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A dynamic model of unsecured credit

Daniel Sanches ()

Journal of Economic Theory, 2011, vol. 146, issue 5, 1941-1964

Abstract: We study the terms of credit in a competitive market in which sellers (lenders) are willing to repeatedly finance the purchases of buyers (borrowers) by engaging in a credit relationship. The key frictions are: (i) the lender cannot observe the borrowerʼs ability to repay a loan; (ii) the borrower cannot commit to any long-term contract; (iii) it is costly for the lender to contact a borrower and to walk away from a contract; and (iv) transactions within each credit relationship are not publicly observable. The lenderʼs optimal contract has two key properties: delayed settlement and debt forgiveness. Finally, we study the impact of changes in the initial cost of lending on the contract terms.

Keywords: Unsecured; loans; Dynamic; contracting; Delayed; settlement; Debt; forgiveness; Initial; cost; of; lending (search for similar items in EconPapers)
Date: 2011
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